Registered Education Savings Plan (RESP)

byFrugalTraderonJanuary 17, 2009

RESP?

I’m getting to the stage in my life where I have to start considering kids into my life plan. How will kids fit into the financial picture? How will I teach my kids proper financial values? How will I help pay for their education?

The last question, “How will I help pay for their education” is what we’re going to discuss today. I’m not saying that I plan on footing the entire University/College bill, as I paid for my own, but I would like to be able to help my children if they need it. I guess the only way to ensure that money is available when the time comes is to save for it.

In Canada, this naturally leads us to the Registered Education Savings Plan (RESP). The RESP is a government incentive for parents to save for post secondary education for their children.

How RESPs work:

Unlike an RRSP, with an RESP, there is no tax deduction on the contributions. You do, however, get tax free growth in your RESP portfolio.

The RESP account can grow tax free and taxed in the hands of your lower income child when it comes time for University. Contributions can be withdrawn tax free (at any time) since they are paid with after tax dollars.

Maximum contribution is $4000 annually New rules state that there is no maximum annual contribution limit only the lifetime max (21 years) of $50,000.

CESG: Contributions up to $2500 annually are eligible for the Canadian Education Savings Grant (CESG). The CESG will give you an extra 20% on your contributions (up to $500 CESG annually).

Enhanced CESG: Low income families (<$36,378) are eligible for up to $600 in CESG annually (extra 20% on the first $500 in contributions). If your family income is between $36,378 and $72,756, you are eligible for up to $550 CESG annually (extra 10% on the first $500 in contributions).

If there is unused grant room from previous years, you are eligible for up to $1,000 in CESG for that year.

There is a lifetime max CESG of $7,200 per beneficiary/child. Caveat: If your child does not go to University, the CESG must be repaid to the govt.

RESP funds can be transferred to an RRSP account (max $50k) if not utilized after it’s maximum lifespan.

What I like about RESP’s:

The CESG, which would give us a 20% increase on our RESP contribution / year of up to $2,500 ($500 CESG). Ie. A $2,500 contribution would be topped up with a $500 government “gift” giving us $3,000 for that year.

Tax free growth – I could mix up the portfolio with fixed income products and not worry about the 100% taxation of interest income.

Ability to transfer the portfolio into my RRSP in case my child/chlidren do not go to University (not if I can help it ;)).

What I don’t like about RESP’s:

If my child/children do NOT go to University/College (or other qualified educational institutions), I am limited to transferring $50k of the RESP earnings/growth to my RRSP provided that I have the contribution room. If I don’t have the room at the time, I’m assuming that the remaining will have to be withdrawn as INCOME. Which means a 20% penalty AND taxed at my marginal rate! Note that the capital can be withdrawn at any time without taxation.

On top of the taxation, I would be forced to pay back all CESG’s given. So assuming that I receive the lifetime max of $7200, that would mean I would have to pay: $7200 + 20% penalty (on growth) + income tax (on growth). Ouch.

The chance that the beneficiary will not go to University has grave tax consequences when it comes to an RESP. Perhaps a better solution would be to open a separate non registered account and invest in dividend paying stocks. At least then, if the child decides against post secondary schooling, you’ll have a nice portfolio to boot.

Update Jan 19, 2007: According to a reader comment, the RESP is the best way to go if you are planning on saving for your child’s educational future. Reason being is that if your household has a fairly high income with education as a high priority, there is a HIGH probability (>75%) that your child/children are going to participate in post secondary education of SOME sort. Also, if your child does NOT take post secondary education, only the GROWTH is taxable which can be transferred to your RRSP.

Update March 2010: Check out The RESP Book (link) written by a fellow Canadian Personal Finance Blogger. It is one of the only books written on RESP’s and explains all the ins and outs in an easy to understand manner. Check out my RESP Book review.

Any body out there using the RESP system right now? What do you think of the program? What strategies do you use to maximize the program?

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About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

First of all, I want to state and reiterate some things. I did not comment on these discussions because I was trying to convince the people who didn’t like scholarship plans that they should. I only wanted to correct what I saw as some common misconceptions. I don’t think people are on here deliberately trying to mislead people, but if there is info here that is untrue, that could be the result.

Secondly, I mentioned elsewhere that some of the Scholarship plans have had many plans throughout their life. I think some people still don’t understand what that means. Maybe I wasn’t clear about this, so I will repeat. Some of the companies will have children going to school right now with an older plan. This plan will have different rules and benefits than the plan that that same company is marketing today. This is one of the reasons there is such confusion about Scholarship plans, and why these boards can sometimes confuse. This is why I say that people should look in the prospectus, not ask people on the internet, as their answer might be wrong. http://www.sedar.com

There are two other things that I see repeated that need to be corrected. First, the ‘lumping’ of all Scholarship plans together. There are a few, and there are differences among them. There are two that I honestly don’t like. I try to keep my comments as general as possible, for a couple of reasons, but that does not mean what is true for one company is true for all of them. It pays to do some homework.

The last thing that bothers me is the comparison of GIC to Scholarship plans. I don’t know who started it, but it really is annoying. The question should be ‘why are the banks giving such low returns on GIC’s?’, not ‘How come Scholarship plans can consistently beat them?”. Read the prospectuses.

Again, I know that Scholarship plans are not for everyone. I have no problem with that, and I am sure most people don’t either, so please keep in mind that your choice of investment might not be their cup of tea either.

Again, keeping to generalizations as each company is different, Scholarship plans have lots of options if there are financial problems. Call them and ask what options are available in each situation, or look in their prospectus.

In order for me to ‘report’ a rep saying something that is fraudulent, they would have to say it to my face. Other than that it is hearsay, and I hear a lot of it. I always ask people if they would put it down on paper, and most of the time they won’t. Twice I have forwarded a complaint on, once it was dealt with. That is why I always tell people to document and report something they feel might be wrong. (I hope that question wasn’t intended to imply that I sit by while people are out there misleading people. I have written my Provincial ministers, and the SEC, asking that something be done. (I have also mentioned that MER’s be looked at, as banks do not consider them fees, and tell people that there are no fees for their investments.) The only way that snakes will be caught is if people report them.)

I didn’t mean to imply that a Scholarship plan is the only means of ‘forced savings’, but it works for me. I started when my first child was 9 months old. For nine months I told my wife I was going to research, and didn’t. I eventually let a RESP person into my house, (after many phone calls) and started a plan. I knew I had 60 days to think about it and change my mind, (much better than any other investment out there) so I read the prospectus and liked it more, the more I read. I started with a monthly amount equal to our cable bill. I figured if times ever got tight, I would cut the cable, and I haven’t had to. I have consistently increased my contributions, and now wish I had started with more, but that is life. Previously, I have started a term deposit GIG, and a term deposit RRSP, so I knew that option was there. Thing is, I cashed my term GIC before maturity (no interest, how immoral of that bank – lol) and pulled out my term RRSP when I needed the money. (Oh yeah, I knew how to turn the PAD off, all too well.) When I understood the Scholarship plan, I liked the ‘forced savings’ aspect. As I said, there are a lot of options if I have a financial mishap, but until then, I am making my contributions. After I started with the company, and knew them even better, I started a plan for my second child. Believe me when I say, and you may not be one of them, but there are a lot of people who like scholarship plans, with their eyes wide open.

As to the comparison questions, the group resp’s are front end loaded, so that a two year comparison would be quite slanted. I prefer to compare ten year returns – call then. I appreciate that you might be very happy riding the roller coaster with your child’s money (why have 20% bonds now, btw?) but some people aren’t. I appreciate that you are confident that you will have X amount of money when the time comes, but there are some people who don’t want to take that risk with their child’s savings. Lots of people are aware of what has happened in Japan, and know that the market isn’t a guarantee, and that they might even lose money. I talked with a fellow last night, and his major concern was not losing principle. (I hear this all the time.) He is getting almost no return right now in a bank GIC, and he was okay with that. Again, it is a personal choice.

Another thing that bothers me is when people don’t know the answer to a question, so they assume the answer. That is fine in your own head, but once it is posted, it might mislead someone else. The returns that I have posted for the Scholarship plans are without any attrition. Like I always say, the return of membership fees and attrition are bonuses for the children if they go to school. Even before all the extras, the scholarship plans outperform because they are actively managed funds. (Contrary to another post that I have seen.) There are a lot of options for people who need to change their contributions.

Find out what happens to your growth, and grants if you need to close your bank RESP and pull all of the money when the child is 8 years old. Tell the bank that you need the interest because you have legal bills. Tell them if you don’t get the growth it is ‘immoral’. Scholarship plans have lots of options if a financial hardship occurs.

To post 222:
Again, I was discussing two different plans. One was already mature, one is being marketed today. Different rules. I will say it again. Some Scholarship plans have had many plans over the years. (not all) Don’t compare what a child is experiencing now, with the plan that is currently being marketed. Check the current prospectus for all the ‘what ifs’. I hear it all the time. “My aunt’s, uncles, cousin’s son is going to school and XYZ”. That might not be true of the plans currently being marketed. Again, I like people being able to make their decisions on facts.

As well, like Mulletman has said, people can always choose the lump sum plan. What I encourage is that people open a reasonable (and I always coach people to choose a lower number) monthly or annual plan, and also open a lump sum plan. Then they make their normal contributions, and when they want, they can add additional money. Most of the time they love the idea, ask me to call later, and when the time comes, they have adiffernt obligation. Something came up. But guess what, they are still making their regular contributions, are happy with that, and their child will have the money when needed. Having $50,000 is better than having nothing. Trust me when I say that these people, like me, love the regular contributions.

I talk to a lot of people with 2-8 year old children, and they have started a plan at the bank. Put in money for a while, then ‘suspended’ the contributions. Good intentions – lack of follow through. The money is always needed elsewhere. I personally have been putting off buying a couch, car starter, and many other things, but am always putting money in to my children’s RESPs. Basically, they don’t have much in it at all. I talk to people who will start a plan at a bank, and then ‘realize’ that they can’t afford it.

Again, the purpose of my posting wasn’t to ‘win’ people over, just to ensure that accurate information was being posted. I just talked to a lady who decided to go with the bank. (Fort the record, she never sat down with a scholarship plan person) Did she go with the bank because the bank was better? No, she ‘chose’ the bank by default. The talked to Scholarship plan people at a trade show – some of them slung some mud around. She talked to some friends, and they all told her different/conflicting things. She knew she had to do something, so she went to the bank. Funny thing is the bank didn’t properly explain how their RESP worked. There is some ‘buyer beware’ out there, no matter who you are talking to.

@Mark Since much of what you write is just a reiteration of your earlier comment, I won’t respond to most of it. I did notice one thing that bears highlighting, though. You write: “Even before all the extras, the scholarship plans outperform because they are actively managed funds.”

This strikes me as a little bit odd. You claim that you want to ensure that accurate information is posted, but you also make a brazen claim that because a plan is “actively managed” it must outperform.

This claim is, unfortunately, just plain false. On average, an actively managed fund will underperform a passively-managed fund. Yes, there will be actively-managed funds that outperform in some time periods, but over long timeframes it is a sucker’s bet to try to outperform the markets.

In particular: “If “active” and “passive” management styles are defined in sensible ways, it must be the case that
(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and
(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar
These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.”

@ Mark – it’s not fair to ask people how their bank RESPs are doing (post #218) , and when you get an answer, to not tell me how much I’d have in your firm’s account, given the same information and amounts contributed.

I think it’s because you don’t want to write out that in my bank fund I have $6569, and if I went with your company I’d have… $4,000? I can only assume it’s a lower number.

You do say that your fees are front-end, does that mean that there are $0.00 fees (including mers) after these are deducted?

As for mulletman’s advice above: “Even if you get stuck in a contracted contribution schedule, you can always convert after about 7 – 8 years which would pay the units up on the scholarship plan. You are then free to do what you please.” — what if you run into trouble BEFORE year 7? It happens. That’s not a solution. With my current efund account, I just stop contributing, no harm, no foul, no one gives a darn.

Lastly, what I keep hearing, from salespeople and customers of group plans, is how they offer different (read: fewer) options than bank programs, have large penalties, require more documentation to get funds out than a regular program, bury fees, make misleading statements, seem to hide information, etc. And I have to tell you, the concept of ‘earnings from attrition’ I find repellent on a moral and ethical level and I think attrition is doing a lot more of the heavy lifting of having a higher payout than ‘actively managed’ investing is.

I will reiterate that I am not here to convince you. Your mind is made up. I get it. Don’t need to keep hammering that in.

I do post accurate information, and numbers to back it up. George, feel free to not respond to any, or all, of my comments. Just respond to the parts that you don’t like, I get it. In regards to your comments, I would argue that you are posting opinions (might be right, might be wrong) without numbers to back it up. I am aware that actively managed funds 80% of the time do not beat the index they are measured against. The other 20% do. There are a few managers out there that are worth paying the fees to, it just takes work to find out who they are.

You posted an article, and claim that it proves that all actively managed funds cannot beat the market. It doesn’t. I quote:

Over any specified time period, the market return will be a weighted average of the returns on the securities within the market, using beginning market values as weights3. Each passive manager will obtain precisely the market return, before costs4. From this, it follows (as the night from the day) that the return on the average actively managed dollar must equal the market return. Why? Because the market return must equal a weighted average of the returns on the passive and active segments of the market. If the first two returns are the same, the third must be also.

This is true, but it makes a slight assumption that is hard to catch. Because it lumps all ‘active managed dollars’ of the market into the grouping of ‘actively managed funds’, right here it lost my support. This doesn’t take into account any other investors in the market. Also, even taking that obvious omission out, it also stands to reason that 80% of the actively managed funds could under perform, and 20% could over perform, giving a weight that would equal, (together with the passive money) the average of the market. This in no way proves that some funds cannot provide better than market returns. Your post seemed to claim that was the case.

For the record, I only brought ‘actively managed’ into the picture, because some people kept comparing us to GIC’s, and that our returns should be expected to equal that. I only brought it up to refute that claim, and I have done so. I am not here trying to tell you to take all of your money and go get a financial planner. I believe everyone should do what is comfortable to them.

Geoff:
I never asked how people’s bank funds were doing, I only commented that someone else had asked, and I found it amusing that people weren’t jumping up and down about their returns, like they were a few months ago. (I still note that at the time of her post, it is amusing that no one spoke up.) I am glad that your savings have done well – I am not here to convince you to do anything you are not comfortable with. I would say that you must be a savvy investor, as with an 80% equity and 20% bond mix, you seem to be doing much better than others right now.

As to your comment about comparisons; you seem to be implying that I have somehow tried to hide the fact that the membership fees are front end loaded – please reread my comments and let me know if that is true. Other than that, please quit harping about it. I haven’t hidden it, and don’t feel like talking about it in each post. I am not here to argue, only to ensure that accurate facts are able to be read.
(Also, I don’t want to disclose who I represent for legal reasons. Normally, a Scholarship plan sales person can only be licensed in one province, and this can be read right across Canada. As well, being licensed, I have an obligation to make sure that the information I give is 100% accurate. Anyone else here can post that the sky is green and the moon is made out of Swiss cheese. I have to make sure that none of my statements can be misleading in anyway. While at the same time, I still have a personal opinion, and I want to say it. If I were to say what company I worked for (by mentioning balance/return numbers that only someone internal could know) I am in essence revealing that info.)

Also, again with the assuming: “what if you run into trouble BEFORE year 7? It happens. That’s not a solution.” Obviously you are implying something – if you want to know what each plan has for options, call them or read their prospectus. Quit assuming that, “If I miss one/a few contributions – I lose all my money.” It is probably not true, but it seems that a lot of people here like to repeat that. What if I get a seven year ladder GIC from my bank and need the money now. AAAAAhh – I will lose money. Crap – I wish I never got into this GIC – the bank is evil, etc, etc. A cell phone contract is 3 years, for goodness sakes – I still see a lot of cell phone out there. I get it – you don’t like the obligation – you don’t like attrition. Point made, no need to repeat.

As far as options between a group plan and a bank plan, a group plan probably has MORE options. (get that – the opposite of fewer) (I say probably because I obviously cannot speak to each scholarship plan, but assure you that at least one has more options than the banks.) Unless you have read each companies prospectus, and fully understand their options at maturity, I would have to say that you are GUESSING. When it comes to fees, I would argue that Scholarship funds are much more upfront about their fees than most other investments. (Check into the status of the ‘one page’ information sheet the SEC is trying to impose on the investment world. See who is fighting it – banks and mutual funds, or Scholarship plans. We aren’t, because we already disclose all fees.)

I mean:
“offer different (read: fewer) options than bank programs, have large penalties, require more documentation to get funds out than a regular program, bury fees, make misleading statements, seem to hide information, etc.”
No mud or opinion there. lol

Again, please find out from your bank what happens if the conditions for an EAP or AIP are not met. Please post your answer here.

Let’s please keep this conversation civil. I am not trying to convince you of anything, I won’t knock your decisions for your family. I understand that your opinion is very set, and I have not desire to change your mind. There is no need for you to keep objecting to the same points that you don’t like. I get it. You will (probably) not (although I always keep an open mind) convince me of anything, so no use in trying.
Cheers,
Mark

Mark, I don’t get your post, nor do I think anyone here acted without civility. I am simply saying that I am very confused by the scholarship plans out there, and that rather than simplifying them, your posts have left me more confused.

As for your comment here: “What if I get a seven year ladder GIC from my bank and need the money now. AAAAAhh – I will lose money.” No, you will lose your interest that you would otherwise have learned, but I get back every dollar I put in. Everything I’ve read,

As for fees, Canadian Capitalist said it best: “The total impact of all the fees on a group scholarship plan is of the order of 2.15% (1.25% for the impact of the enrolment fees and 0.9% for other fees). While that compares favourably with high-MER mutual funds, it is certainly not 3 times cheaper. And parents have a much better option than having to choose between Tweedledee and Tweedledum: they can walk down the street to a TD Canada Trust branch and open a RESP account and invest in TD e-Series mutual funds for a total cost of less than 0.5%. Now, that is more than three times cheaper.” http://www.canadiancapitalist.com/the-mer-on-group-scholarship-plans/

And finally, I really would love to know the $ amount I’d have left in your unnamed group scholarship fund.

It’s really not fair to say that I’m not listening or open to ideas. Read my posts (under Geoff or Novice, I’m trying to lose the ‘novice’ name now that I’m getting more saavy) and I like to think they’ll show someone who’s more open than you think to good logic, and open discussion.

If you get in trouble before 7 – 8 yrs, just dial down the amount of your obligation. You can put as little as $5 per month. That, certainly, is not a hardship. I am just stating that there are options here and not go get all hung up on contracted obligations in a group plan.

As for pros and cons of group vs. self administered RESP’s, I’ll let the rest of you duke it out…. I can’t wait to when it gets to whose father can beat up whose……

If you get in trouble before 7 – 8 yrs, just dial down the amount of your obligation. You can put as little as $5 per month. That, certainly, is not a hardship. I am just stating that there are options here and not to get all hung up on contracted obligations in a group plan.

As for pros and cons of group vs. self administered RESP’s, I’ll let the rest of you duke it out…. I can’t wait to when it gets to whose father can beat up whose……

@ Mulletman – I love typing that name out by the way – yes I agree that $5 a month is probably not a hardship. However, if I’m unable to pay my mortgage, maybe that $5 is a hardship afterall. To you and me it might not be much, hand a $5 bill to a homeless person and it might mean living another day.

hi i have had someone come to talk to me about resp for my little girl …. canadian scholorship trust fund, IAP (industrial alliance pacific), and childrens education fund and USC so confused which to pick sounds like CST has lots of negetive reviews anyone know anything good or bad about the others listed i have to decide quickly what to do

@Mommy J – you most definitely do not need to decide quickly for ANY investment. If somebody is telling you that, they’re trying to pressure you into making a rash and unwise decision.

Many people defer putting money into their children’s education savings until it’s far too late, such as when the children are in high school. Even if you’re in that situation, there’s no reason to rush into an investment decision.

If you’re not sure how to invest the money, my suggestion would be to go to your bank and open up a plain self-directed RESP. The bank can walk you through the paperwork (it isn’t that bad). Ask that the money simply be placed into a money market fund for the time being. It won’t grow much, but it’ll allow you to get into the savings habit. Start putting a set amount every few weeks into the account, and while you’re doing that you can research what other RESP options you might choose. You can always transfer the money from there to another RESP account.

Hey, i have a URGENT question. IF your child does not graduate highschool the regular way, but instead decided to take the GED testing, could you still use the RESP with a GED diploma instead of a highschool diploma?

UST and CST are scholarship trusts, not regular RESPs. They have a lot of potential restrictions when it comes to taking out your money. If you child does not follow all their rules, you could lose all 18 years of growth of your investments. I would not advise using them.

IA is a mutual fund company with a regular RESP, but they tend to stick people into their Diploma fund that pays their salespeople far more and has huge penalties to get out of. I would not recommend them either.

Most major mutual fund companies offer an RESP. Your time horizon is less than with your RRSP, so it is usually best to stick with a broad-based investment. If your oldest child is under 10-12, then it is probably best to have it mostly or all in equities, depending on your risk tolerance and experience with investing. Most often, a high quality global fund provides the most diversification and growth opportunities.

There is no need to try to make a major investment decision. One good qualify diversified investment can be fine.

This is an area where getting some professional advice can be worth it. There are multiple grant programs available, depending on your situation. There is an important discussion about how much to save. Do you want to pay for tuition and books only, or also living expenses? You probably want to support your child, but studies show that the more money you give your kids, the poorer they will be later on in their life. Structuring it so that it is a valuable learning experience for your children is probably more important than how much you actually save.

No problem. As long as your child is doing a post-secondary education program that qualifies, having a regular grade 12 or GED should make no difference.

Here is a quote from CRA about qualifying programs:

“A qualifying educational program is an educational program
at post-secondary school level, that lasts at least three
consecutive weeks, and that requires a student to spend no less
than 10 hours per week on courses or work in the program.
A specified educational program is a program at
post-secondary school level that lasts at least three consecutive
weeks, and that requires a student to spend not less than
12 hours per-month on courses in the program.
A post-secondary educational institution includes:
? a university, college, or other designated educational
institution in Canada;
? an educational institution in Canada certified by Human
Resources and Skills Development Canada (HRSDC) as
offering non-credit courses that develop or improve skills in
an occupation; and
? a university, college, or other educational institution outside
Canada that has courses at the post-secondary school level,
as long as the student is enrolled in a course that lasts at
least 13 consecutive weeks. ”

Any chance we could get people’s experiences of withdrawing money? We only have the horrors that Isabella (post #120 or thereabouts) years ago.

This September our oldest daughter will be off to college and I’d like to understand if the challenges are still out there for removing the money. Does the money get transferred into the child’s bank account or does a portion get assigned directly to the school the child will be attending?

What if the EAP isn’t sufficient to pay for the entire year’s tuition? Can the additional monies be withdrawn during those first 13 weeks? (The link to the CRA site previously quoted is broken.)

Scholarship plans are not for everyone, but can be very useful for the majority. When making a decision for your childs future, proper financial planning with a licensed Advisor would be an asset. Dealing with a licensed advisor that is also licensed with a Scholarship Fund would be able to answer all question and deal with any future concerns you may have. Please remember that there are fees in every form of investment, RESPS, Mutual funds, Segregated funds etc.
Dealing with a Financial advisor will consider your financial postion today and help paint a picture of your future financial postion and help direct you accordingly in regards to which type of plan you should opt for (Scholarship or mutual funds)

My wife and I plan to open an RESP for our child. The child’s grandmother would like to open a second RESP for the same child. Assume that parties contribute $2500 each year, for a total of $5000. We know that only $500 will be contributed by the government. The question is, how do we determine which account will get the CESG payment? We naturally want the matched portion to end up in our RESP account.

Similarly, what if each party contributed $1250 per year? Would each account receive CESG payments of $250?

Maybe I’m missing some key information, or thinking of this the wrong way.

First off, I have to say what a great site this is…very happy to have stumbled across it. I’ve been reading a lot of the posts and comments, and have learned quite a bit, but there are still a couple of questions I have about RESPs.

I know that I’m starting a bit late (my daughter is 9), but I figure I have about a 10 year window to try to get some money growing for her post secondary education. Here’s what I was thinking of doing (and please let me know if you think this isn’t the best idea – I’m open to suggestions!). I have about $30,000 that I would like to invest in 1 or a few income generating ETFs which have distribution yields of around 6-7% (for example, Claymore Canadian Financial Monthly Income ETF – TSX:FIE). I would set up an automatic DRIP and hope that the investment might be able to grow at a modest annual rate of 6%. Here are some questions I have in regards to this plan:

1. Should I register this fund in an RESP? I realize that I would forego the dividend tax credit, but tax information given by this fund states that 93.5% of the distribution is made up of ROC and only 6.5% are eligible dividends, so there really wouldn’t be much of a tax credit. I’m thinking that registering it would be the best idea.

2. If I do register it in an RESP, would the dividends and ROC which are automatically being reinvested each month count as ‘official’ contributions in order to qualify for the CESG each year? Or would I have to make separate contributions each year out of pocket to qualify?

3. Do contributions still count for the CESG if they are made during the time she is attending the post secondary institution and has already withdrawn from the plan?

4.I realize that because most of the distribution is ROC, this will accelerate the capital gains, as it will decrease the adjusted cost base of the investment. But will all capital gains, dividends and ROC be taxed the same for my daughter (at her lower rate) when she withdraws the investment for post-secondary education?

WARNING: for those of you who have modest income and larger families and live in Ontario: If you think your child will receive OSAP (there is an aid estimator on the OSAP site) please be advised that RESP EAP’s are reducing the amount of non-repayable grants that your child will receive….What is really sad is that any RESP principal withdrawal is considered income for OSAP purposes (see footnote 33 line 850 of the OSAP aplication on page 11). This means that although this withdrawals are not taxable, the Ontario governement reduces your grants by 15-25% of the withdrawal…THIS WIPES OUT ANY ADVANTAGE THAT RESP’S HAVE. In conclusion low income, large family: it might not worth the effort, the fees, and the risc

A word of caution to all parents who have their RESPs invested in equity based funds – the markets have reached and surpassed their 80 year cycle – we are going to enter a new cycle where stocks are going to head lower. Please reconsider your investment choices as this could have a huge impact on your RESP accounts.

Deepak I think your timing is very close but I think if you take the interday high that was made in 2000 & the interday high made in 2007 in the dow & draw the upper line for the jaws of death pattern lower line would be the 2002 low & the 2009 low. The market (dow) will most likely touch the upper line before “THE TOP” is in. As in 1929, 1987, 1974, 2000,2007 the market touched the upper trend line of the rare jaws of death pattern before the crash. This is the largest jaws of death pattern I have ever sean going back to 1896 in the dow.

As for RESP accounts I think they are the worst investment anyone can make. Let the child take responsibility for themselfs,You save your money & send your kid to school & they will not respect the money they will spend money like water i.e., have a cell phone, not cook thier own food, drink, not work for a little extra cash in thier spare time, instead run up their credit card because they have less understanding of how hard it is to obtain money when it is given to them. ( dont give them a fish but show them how to fish & let them catch their own)

A lot of times it is not even practical to speculate in education & right now I think it is one of the worst investments because education is in a bubble everyone thinks its a good investment & the amount of debt created by getting an education is dangerous just like a high level of debt in any speculative investment is dangerous. Like any investment buy it when everyone thinks its a bad investment.

Most think thier kid or kids are differnt & wont let thier kids make it on thier own but almost everyone is wrong. Sometimes it is best to teach your kids early about money & let them get burned so they respect money sooner in life.

With a RESP, you lose control of the money and that might be very important in some situations. I have had RESP for my 6 children and my 12 grandchildren. A maddening scenario is developing here. One of my daughters has split with her husband and the daughter has taken side with her father and is not talking with her mother at all. She is getting 5K of RESP payments yearly from CST and is not even uttering a thank you for it.
My intention in setting those up was to help my daughter with her child`s education, not my granddaughter directly. Her education is 15 K. According to Ontario`s courts, it is to be divided 5K from the father 5K from the mother and 5K from the student. If I had it my way the 5K from CST would flow through my daughter and the estranged husband and the estranged daughter would each pay 5K. BUT, the court sees it as her money, so she can afford to not work in the summer and my daughter still has to pay her 5K. I have no control over it and it drives me crazy.
I am considering cancelling all 5 remaining plans but that would entail big losses. Another option is to shift the beneficiary for her 2 remaining children to another daughter`s children and helping the separated daughter directly with other funds later. What if other separations occur!! If I was to start again, I would keep my options open and NOT take RESPs.

There are penalties for collapsing an RESP, but the end result would approximately be as if you had used an unregistered investment account from the beginning. But you say you are using CST, which is known to be expensive and imposes additional penalties for various things. Shifting beneficiaries sounds like a good choice, or even just stick with the ungrateful granddaughter (perhaps she will say thank you someday). Or, offer the payment to her as an informal loan and ask her to pay it back. If you collapse accounts, the only winner is CST.

If I were in your shoes and had to do it again, I would go with a vanilla RESP from a bank. TFSA would also be a good alternative, especially if I couldn’t get CESG for a particular grandchild.

The grant will go to each RESP in proportion to the contributions. If you contribute too much in total, the RESP contributed to first will get the grant.

If you and the grandmother both contribute to separate plans, each plan will get the grant. If there is a risk of overcontributing, then contribute your portion early in the year, so you get the grant in your plan.

The process is that you contribute. At the end of the month, the RESP administrator (fund company) applies for the grant. HRDC looks at the total grants paid to date for the life and year to verify the grant is warranted, and then send the grant to the RESP administrator for the end of the following month.

I believe that the scholarship trust plan is yours, not your granddaughters. You can just cash it in, pay the penalty and keep the rest.

With your scholarship trust, you have to pay a large penalty if you stop contributing, even if you do not take any money out. However, it might still be worth doing if the kids are relatively young. You essentially pay a $2,000 penalty, which is the commission the salesperson made to sell you the CST. But if you reinvest it in a mutual fund RESP, you might be able to make all that back and more with a reasonable expectation of returns.

With a scholarship trust, you can usually only change the beneficiary if the main beneficiary is under 14. In your case, changing the beneficiary is probably no longer possible. With a mutual fund RESP, you can change the beneficiary even after they reach their 20s.

Unless you want your RESP, and Government Grants to be invested in a Term GIC, beware of TD Canada Trust’s RESP !

If you want your RESP invested in mutual funds, if you want to receive Government Grants that are available (beyond the CESG), and, do not want a RESP account plus a Term GIC account (yes, two accounts!), look at either Royal Bank of Canada, Scotia Bank, CIBC or Bank of Montreal and not TD Canada Trust!

TD Canada Trust’s policy dictates that if you wish to receive Government Grants such as the a-CESG, the Canadian Learning Bond, Quebec Education Savings Incentive, or the Alberta Centennial Education Savings Grant, they will only process the applications if the funds from these Grants are placed into a Term GIC. And, these funds cannot ever be rolled into your mutual fund RESP or transferred.
You have no choice in this !

With TD Canada Trust, if you wish your TD Canada Trust RESP be invested in Mutual Funds, and, you also wish to receive Government Grants beyond the CESG, you must have two RESP accounts (imagine the headaches for you the subscriber, and also the problems when the beneficiary begins his or her post-secondary education) with this. You have no choice with TD Canada Trust.

Royal Bank of Canada, Scotia Bank, CIBC or Bank of Montreal do not have such a restrictive policy.